Journal of Evolutionary Economics

, Volume 25, Issue 2, pp 323–344

Sunk costs and the speed of market selection

Regular Article

DOI: 10.1007/s00191-014-0389-x

Cite this article as:
Hölzl, W. J Evol Econ (2015) 25: 323. doi:10.1007/s00191-014-0389-x

Abstract

This paper studies the influence of sunk costs on industry evolution using the stylized pure selection model developed by Metcalfe. It is shown that sunk costs influence industry dynamics by reducing the speed of the replicator dynamics of competitive selection. Based on the theoretical model, we argue that sunk costs should lead to a reduction of market share reallocation dynamics and a larger share of stable firms. We validate these predictions empirically, finding that higher-sunk-cost industries have a larger share of stable firms and display lower market share dynamics. The result has practical implications for the interpretation of productivity decompositions.

Keywords

Competition Intensity of competition Firm growth Productivity decompositions 

JEL Classification

L11 D24 B52 

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  1. 1.Austrian Institute of Economic Research (WIFO)ViennaAustria

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